What are we looking for?
U.S. home builder stocks with attractive valuations and return on equity which benefit from lower interest rates.
The Thomson Reuters North America home building and Construction Supplies Index had trailed the North American Cyclical Consumer Goods and Services Index until July 16. However, year-to-date, the home building index has surged 22.46 per cent, outperforming the cyclical index’s 11.85-per-cent gain. Lower interest rates tend to boost housing demand by making mortgages more affordable, and home builder stocks often rally when the U.S. Federal Reserve cuts rates. The recent half-percentage-point rate reduction by the Fed has helped lift North American equities, with home builders seeing significant gains.
In August, U.S. housing starts jumped 9.6 per cent, well above the 3.2-per-cent forecast, marking their highest level since March, 2022. Building permits also rose 4.9 per cent month-over-month, rebounding from a 3.3-per-cent drop in July. High consumer confidence, a driver of home buying, is adding to this momentum. The CB Consumer Confidence Index reached 103.3 in August, its highest level since March, further fuelling optimism and real estate investment.
The screen
We used Trading Central Strategy Builder to search for U.S. home builder stocks that have reasonable valuations combined with strong return on equity and low debt levels.
We started by zeroing in on the home building and construction sector, searching for stocks that demonstrate a strong return on equity (ROE) of 10 per cent or higher.
To identify value opportunities, we will screen for home builder stocks with a price-to-earnings (P/E) ratio below 15, seeking those trading at a discount compared with the S&P 500 average of 26.75.
Finally, we focused on companies with a debt-to-equity ratio of 1.0 or lower, targeting those with lower financial leverage to reduce risk in a rising interest-rate environment.
We have also included year-to-date, and one-year price performance for your reference.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Topping our list is PulteGroup Inc. PHM-N, which has the highest return on equity on our list at an impressive 26.92 per cent, reflecting solid profitability. The Atlanta-based company has delivered impressive performance, with a one-year return of 84.4 per cent and a year-to-date gain of 38.8 per cent. PulteGroup’s low debt-to-equity ratio of 0.19, the lowest on our list, indicates conservative financial management and lower leverage. With a relatively low P/E ratio of 10.76, PulteGroup presents a compelling value opportunity in the home building sector despite the stock trading at a new record-high at the time of this writing.
Green Brick Partners Inc. GRBK-N, a Texas-based diversified home building and land development company, has the highest year-to-date price return on our list at 55.6 per cent. The stock has a low debt-to-equity ratio of just 0.23, a P/E of 11.08 and a return on equity of 26.29 per cent. The stock is trading at a new 52-week high at the time of this writing.
Trading Central Strategy Builder offers a back-testing feature that allows users to assess the historical performance of an investment strategy. Utilizing a five-year historical period with quarterly rebalancing, the described screen had a 27-per-cent annualized total return, outperforming the S&P 500 Index, which achieved a 13-per-cent annualized total return over the same period.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.